Butler Corporation has three divisions, each operating as a responsibility cente
ID: 2597100 • Letter: B
Question
Butler Corporation has three divisions, each operating as a responsibility center. To provide an incentive for divisional executive officers, the company gives divisional management a bonus equal to 15 percent of the excess of actual net income over budgeted net income. The following is French Division’s current year’s performance.
The president has just received next year’s budget proposal from the vice president in charge of French Division. The proposal budgets a 5 percent increase in sales revenue with an extensive explanation about stiff market competition. The president is puzzled. French has enjoyed revenue growth of around 10 percent for each of the past five years. The president had consistently approved the division’s budget proposals based on 5 percent growth in the past. This time, the president wants to show that he is not a fool. “I will impose a 15 percent revenue increase to teach them a lesson!” the president says to himself smugly.
Assume that cost of goods sold and selling and administrative expenses remain stable in proportion to sales.
Prepare the budgeted income statement based on French Division’s proposal of a 5 percent increase.
If growth is actually 10 percent as usual, how much bonus would French Division’s executive officers receive if the president had approved the division’s proposal?
Prepare the budgeted income statement based on the 15 percent increase the president imposed.
If the actual results turn out to be a 10 percent increase as usual, how much bonus would French Division’s executive officers receive since the president imposed a 15 percent increase?
Butler Corporation has three divisions, each operating as a responsibility center. To provide an incentive for divisional executive officers, the company gives divisional management a bonus equal to 15 percent of the excess of actual net income over budgeted net income. The following is French Division’s current year’s performance.
Explanation / Answer
Current Year Income Statement Amount ( $) %age of sale Sales revenue $2,000,000 100 Less: Cost of goods sold $1,250,000 62.5 Gross profit(2000000-1250000) $750,000 37.5 Less: Selling & admin. expenses $450,000 22.5 Net income ( 750000-450000) 300000 15 A.Budgeted Income Statement based on french division proposal of 5% increase Perticulers Current increase 5% Sales revenue ( 2000000+2000000*5%) $2,000,000 $2,100,000 Less: Cost of goods sold @62.5% of sale $1,250,000 $1,312,500 ( 2100000*62.5%) Gross profit $750,000 $787,500 Less: Selling & admin. expenses@ 22.5% of sale $450,000 $472,500 ( 2100000*22.5%) Net income $300,000 $315,000 B. If growth is actually 10 percent as usual, how much bonus would French Division’s executive officers receive if the president had approved the division’s proposal Actual Income Statement based on usal growth of 10% increase Perticulers Current increase 10% Sales revenue ( 2000000+2000000*10%) $2,000,000 $2,200,000 Less: Cost of goods sold @62.5% of sale $1,250,000 $1,375,000 ( 2200000*62.5%) Gross profit $750,000 $825,000 Less: Selling & admin. expenses@ 22.5% of sale $450,000 $495,000 ( 2200000*22.5%) Net income $300,000 $330,000 Net Incease in Actual Income over budgeted income $15,000 ( 330000-315000) Executive Received ( 15000*15%) bonus $2,250 C. Prepare the budgeted income statement based on the 15 percent increase the president imposed Budgeted Income Statement based on president proposal of 15% increase Perticulers Current increase 15% Sales revenue ( 2000000+2000000*15%) $2,000,000 $2,300,000 Less: Cost of goods sold @62.5% of sale $1,250,000 $1,437,500 ( 2300000*62.5%) Gross profit $750,000 $862,500 Less: Selling & admin. expenses@ 22.5% of sale $450,000 $517,500 ( 2300000*22.5%) Net income $300,000 $345,000 D. If the actual results turn out to be a 10 percent increase as usual, how much bonus would French Division’s executive officers receive since the president imposed a 15 percent increase Actual Income Statement based on usal growth of 10% increase over budget proposal 15% Perticulers Current increase 10% Sales revenue ( 2000000+2000000*10%) $2,000,000 $2,200,000 Less: Cost of goods sold @62.5% of sale $1,250,000 $1,375,000 ( 2200000*62.5%) Gross profit $750,000 $825,000 Less: Selling & admin. expenses@ 22.5% of sale $450,000 $495,000 ( 2200000*22.5%) Net income $300,000 $330,000 Increase in net income over budgeted ( 330000-345000) ($15,000) Bonus to executive Nill
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